In Beirut this week, the French diplomat Pierre Duquesne, in charge of the implementation of the resolutions of the April 2018 conference in Paris (CEDRE), delivered on Thursday his thoughts and impressions at the end of his visit. A mission during which he met about thirty senior Lebanese officials, bank representatives, entrepreneurs, civil society members, and donors involved in the process.

At CEDRE, the donors pledged to release $ 11.6 billion in loans and grants to finance infrastructure projects included in the Capital Investment Plan (CIP) prepared by the government. The funds will be disbursed only if the country, which is highly indebted and poorly governed, initiates important structural reforms. However, Lebanese leaders have been unable to avoid multiple delays since the conference, raising fears and doubts regarding the financial commitments that were made.

"What I heard is the willingness of officials to move the process faster than during the last seven months," Duquesne summed up to reporters during the press conference held at the French Institute right before his departure from Lebanon. He also reiterated that "the CEDRE process [was] still effective and endorsed”. "It is true that the skepticism of the contributors has increased in recent months, but they remain ready to help as long as things are progressing well on the Lebanese side," said the diplomat.

Moreover, Mr. Duquesne also said that the funds had not started to be disbursed and that, despite the fact that no date has been set yet, a successful passing of the budget for 2020, which meets the objectives set to begin to restore the country’s financial footing, could serve as a starting point for a gradual release of the CEDRE funds in order to start funding the highest priority projects.

A well-acknowledged emergency

Mr. Duquesne referred to the meeting organized Monday by President Aoun in Baabda, during which representatives of the entire Lebanese political spectrum declared a "state of economic emergency". "The urgency of the economical and financial situation is now recognized and understood (...). This agreement could have been made earlier, but it remains important and relevant," he said. He further recalled that his arrival in Lebanon on the day of the meeting, in which he did not participate, was merely a coincidence.

The French envoy cautioned that the possible offshore natural gas discoveries would not be a “miracle solution” to the country’s economic woes as some are hoping. In 2018, Lebanon granted its first exploration and production licenses to two out of the ten blocks in its EEZ (No. 4, center-east, and No. 9, south-east) to the Total-ENI-Novatek consortium. The first drilling in Block 4 is due to start by the end of 2019, but the country has already launched a second round of bidding, this time putting five blocks up for bids.

The diplomat urged Lebanese leaders to launch the necessary reforms without any delay in order to rebalance public finances, restructure the economy and put the electricity sector back on its feet. "I understand that there may be legitimate differences between political views regarding the combination of measures to be adopted (...) But time is of the essence and we can not debate ad infinitum," he said. On this subject, the diplomat notably insisted on the adoption of a budget for 2020 within the constitutional deadlines, i.e. before its execution date, which goes further than the law of finances from 2019, voted through on July 19th, in terms of reforms and measures to reduce the public deficit on a sustainable basis.

Taxation to be reviewed

This objective set at CEDRE - a decline in the debt / GDP ratio by one point per year for five years - can be reached the country’s political leaders, provided they continue the decline in public spending that has begun this year and "where the main effort should be focused on", according to Duquesne. He also went on to say that an increase in taxation was needed, through the measures could be uncomfortable and painful. "The level of taxation [in Lebanon] is not yet what it should be," said Mr. Duquesne, before suggesting that the budget focuses on "pocket revenues", meaning an increase in taxation on products, services and sectors "that are not heavily taxed, such as cigarettes".

This path, as well as the one proposing a 15% increase on VAT on certain products, was already put on the table at the meeting on Monday, and has not been approved at the time of writing. "The compulsory rate of collection (levy) in relation to the Lebanese GDP must be slightly higher than 11%. I am not saying that we must apply the French model where it reaches (nearly) 50%, but the margin of maneuver exists between these two thresholds," explained Mr. Duquesne. This vision is unlikely to be accepted by of the elements of the population who mobilized during meetings regarding the budget for 2019 in order to protest the austerity measures promised by Lebanese leaders. However, Duquesne said that he was informed by his Lebanese interlocutors that several other reform projects (public contracts, the fight against tax evasion, and the removal of tax loopholes) were in the pipeline.

The diplomat also urged leaders not to postpone the rise in electricity rates, which have been subsidized for a quarter of a century. The executive adopted the electricity reform plan in the spring and one of its components was to plan the rate increase from the beginning of 2020, in a progressive manner and in parallel with the increase in production, which is also scheduled. "We must keep this commitment in order to maintain confidence (...). This is not only to catch up with stagnation since 1994, (...) but to make a move," Duquesne insisted. Mr. Duquesne also reiterated the importance of creating an independent regulatory authority for the sector. "We are evolving in a modern economy which requires a modern and independent regulation," he said. However, the plan for reforming the electricity sector has been adopted without addressing the question of the body’s creation, which is already provided for by a law (No. 462/2002).

The lira’s stability

Asked about the progress of the two follow-up mechanisms established at CEDRE which are still under work - a first one in Beirut which focused on the implementation of projects and a second, larger one to be held abroad and dedicated to coordination - Mr. Duquesne said they "were moving ahead", without giving a deadline. "In terms of the dedicated website (which will gather all the data on CEDRE projects, Ed.), it’s taking a little time, although there are no specific difficulties," he noted.

Finally, Mr. Duquesne, at the request of a journalist, shared his opinion concerning the maintenance of the fixed parity of the Lebanese lira against the dollar, in effect since 1997: "I had the happiness to work in the administration of the Treasury in France (...) and I experienced one of the biggest currency crises in 1992 (...). So I learned to be extremely cautious. What I can tell you is that I think that a fixed parity has more advantages than disadvantages”. In an interview given this week on CNBC, Prime Minister Saad Hariri said that one of the reasons that had convinced Lebanese leaders not to seek help from the International Monetary Fund was the fact that his experts advocated that they should let the lira float.

(This article was originally published in French in L'Orient-Le Jour on the 6th of September)